PAYMENT OF

BONUS ACT,
1965
 What is Bonus??
• An Industrial enterprise makes profits by the joint contribution of labour and
capital.
• Hence labour should have share in profits and in prosperity of the
enterprise.
• Bonus represents such share in profits and in prosperity of the enterprise.
• Bonus is nothing but such share of an employee.
• Thus the concept of bonus is any payment which is made beyond the salary
of an employee and is usually linked to productivity, whether individual or
collective.
• It is intended to provide stimulus to employees.
 HISTORICAL BACKGROUND
• The tradition of payment of bonuses in India began during the World War I, when
some textile mills gave their employees a 10% wage increase as a war bonus in
1917.
• A full bench of the Labour Appellate Tribunal on observing that Bonus could no
longer be considered as an “Ex Gratia” payment.
• A plea was made to raise the formula the formula for calculating the Bonus in 1959.
• A tripartite Commission was set up in the year 1961 by the Government of India
with the objective to examine the issue of payment of bonus based on the
earnings to the employees working in the establishments in a detailed manner and
make recommendations to the government.
• It was on the recommendation of this Commission that the Payment of Bonus Act
1965 and it came into effect on 25th September 1965.
PAYMENT OF BONUS ACT 1965
OBJECTIVES:-
• To Impose a Legal Responsibility upon an employer of every
establishment covered by the Act to pay the bonus to employees in
an establishment.
• To identify the minimum and maximum percentage of bonus.
• To prescribe the formula for calculating bonus.
• To provide redressal mechanism.
APPLICATION OF THE ACT
• This act shall apply to every factory and every other establishment in
which twenty or more persons are employed on any day during an
accounting year.
• Provided that an appropriate government may after giving two months
notice of its intention to do so by notification in the Official Gazette, apply
the provisions of this Act to any establishment or class of establishments
including an establishments being a factory employing less than twenty
persons as may be specified in the notification so however that the
number of persons so specified shall in no case be less than ten.
Employee Section 2(13)
• Any person other than apprentice employed on a salary or wage not
exceeding twenty one thousand rupees mensem in any industry to
do any skilled, unskilled manual, supervisory, managerial,
administrative, technical or clerical work for hire or reward whether
the terms of employment be express or implied.
• Note: The wage limit has been raised (from 10000) by the amendment
of 2016 (w.e.f 1.04.2014)
And bonus calculation limit has also been raised to Rs 7000 from 3500
by same amendment.
QUESTION
An employee engaged in an Industrial establishment drawing wages of
Rs 20,500 per month. What is the amount of Bonus paid to him at the
rate of 10% by the employer for an accounting year under the payment
of bonus act 1965?
1. Rs 9600
2. Rs 10250
3. Rs 8400
4. Rs 9200
 Solution

Bonus Ceiling= Rs 7000

7000 (Bonus Ceiling) x 10%= Rs 700

700x12= Rs 8400
SECTION 3: ESTABLISHMENTS TO INCLUDE
DEPARTMENTS, UNDERTAKINGS AND BRANCHES
• Where an establishments consists of different department or has
branches whether situated in the same place or in the different places
then all such departments or branches shall be treated as parts of
same establishment for the purpose of computation of bonus under
this Act.
• Provided that where for any accounting year a separate balance sheet,
profit and loss account are prepared and maintained in respect of any
department or branch, then they shall be treated as separate establishments
for the purpose of computation of bonus under this Act for that year.
K.C.P.E ASSOCIATION, MADRAS V.
K.C.P.E Ltd
• The Supreme Court had held that the workmen of the industrial Unit
located at Madras (now Chennai) could not claim bonus on the basis
of single establishment.
• As per the proviso of Section 3 which was attracted on the ground
that separate balance sheet and profit/loss accounts of the Unit
which have been prepared and maintained in the past and during the
relevant years of accounting also.
SECTION 4: COMPUTATION OF GROSS
PROFIT
The gross profits derived by an employer from an establishment in
respect of any accounting year shall:-
In the case of a banking company, be calculated in the manner specified
in the First Schedule;
In any other case, be calculated in the manner specified in the Second
Schedule.
SECTION 6: SUMS DEDUCTIBLE FROM
GROSS PROFITS
• Any amount by way of depreciation admissible in accordance with the
provisions of Section 32 of the Income Tax Act, or agricultural income.
• Any amount by way of development rebate or investment allowance or
development allowance which the employer is entitled to deduct from his income
under the Income Tax Act.
• Subject to the provision of Section 7, any direct tax which the employer is
liable to pay for the accounting year in respect of income, profits and gains
during that year.
• Such further sums as are specified in the respect of the employer in the Third
Schedule.
SECTION 7: CALCULATION OF DIRECT
TAX PAYABLE BY THE EMPLOYER
• Any direct tax payable by the employer for any accounting year shall be
subject to the following provisions, to be calculated at the rates applicable
to the income of the employer for that year, namely:-
• Any loss incurred by the employer in respect of any previous accounting
year and carried forward under any law relating to direct taxes;
• Any arrears of depreciation which the employer is entitled to add to the
amount of the allowance for depreciation for any following accounting
year or years.
• Any exemption conferred on the employer under section 84 of the
Income Tax Act.
• Where the employer is a religious or a charitable institution to which
the provisions of Section 32 do not apply and the whole or any part of
its income is exempted from tax under the Income Tax Act then with
respect to the income so exempted shall be treated as if it were a
company in which the public are substantially interested within the
meaning of that Act.
• Where the employer is a individual or a Hindu Undivided Family, the
tax payable by such employer under the Income Tax Act shall be
calculated on the basis that the income derieved by him from the
establishment is his only income.
• Where the Income of any employer includes any profits and gains
derived from the export of any goods or merchandise out of India and
any rebate on such income is allowed under any law for the time being
in force relating to direct taxes then no account shall be taken of such
rebate.
SECTION 10: PAYMENT OF MINIMUM
BONUS
• Subject to the other provisions of this Act, every employer shall be
bound to pay to every employee a minimum bonus which shall be 8.33
percent of the salary or wage earned by the employee during the
accounting year or one hundred rupees, whichever is higher, whether
or not the employer has any allocable surplus in the accounting year.
• Provided that where an employee has not completed fifteen years of
age at the beginning of accounting year, the provisions of this section
shall have effect in relation to such employees as if for the words “One
Hundred Rupees”, the words “sixty rupees” were substituted.
SECTION 11: PAYMENT OF MAXIMUM
BONUS
• Where in respect of any accounting year the allocable surplus exceeds
the amount of bonus payable to the employees under that section, the
employer shall be bound to pay to every employee in respect of that
accounting year bonus in proportion to the salary or wage earned by
the employee during the accounting year subject to maximum of
twenty percent of such salary or wage.
SECTION 12: CALCULATION OF BONUS
WITH RESPECT TO CERTAIN EMPLOYEES
• Where the salary or wage of the employee exceeds seven thousand
rupees per mensem then the bonus payable to the employee under
section 10 or as the case may be under section 11 shall be calculated as
if his salary or wage or wage was seven thousand rupees.
SECTION 13: PROPORTIONATE BONUS
IN CERTAIN CASES
• Where an employee has not worked for all the working days in an
accounting year, the minimum bonus of hundred rupees or as the case
may be sixty rupees, if such bonus is higher than 8.33 percent of his
salary or wage for the days he has worked in that accounting year,
shall be proportionately reduced.
SECTION 14: Computation of Number of
Working Days
• For the purposes of Section 13, an employee shall be deemed to have worked
in an establishment in any accounting year on the days on which:-
• He has been laid off under an agreement or as permitted by standing orders
under the Industrial Employment (Standing Orders Act, 1946 or under the
Industrial disputes Act 1947 or under any other law applicable to the
establishment.
• He has been on leave with salary or wages.
• He has been absent due to temporary disablement caused by accident arising
out of and in the course of his employment.
• The employee has been on maternity leave with salary or wage during the
accounting year.
SECTION 15: SET ON AND SET OFF OF
THE ALLOCABLE SURPLUS
• Where on any accounting year the allocable surplus exceeds the
amount of maximum bonus payable to the employees in the
establishment under section 11, then excess shall be subject to a limit
of twenty percent of the total salary or wage of the employees
employed in the establishment in that accounting year be carried
forward for being set on in the succeeding accounting year and so on
upto and inclusive of the fourth accounting year to be utilised for the
purpose of payment of bonus in the manner illustrated in the fourth
schedule.
Section 15 Contd..
• Where for any accounting year there is no surplus or the allocable surplus in
respect of that year falls short of the minimum bonus payable to the
employees in the establishment and there is no sufficient amount being carried
forward and set on under sub section (1) which could be utilised for the
purpose of payment of minimum bonus, then such minimum amount or the
deficiency, as the case may be, shall be carried forward for being set off in the
succeeding accounting year and so on up to and inclusive of the fourth
accounting year in the manner illustrated year.
• Where in any accounting year any amount has been carried forward and set on
or set off under this section, then in calculating bonus for the succeeding
accounting year the amount set on or set off carried forward from the earliest
accounting year shall be first be taken into account.
Section 16: Special Provisions with respect to
certain establishments
• Where an establishment is newly set up whether before or after the
commencement of this Act, the employees of such establishment shall
be entitled to be paid bonus under this Act in accordance with the
provisions of Sub Section (1A, (1B and 1C)
• In the first five accounting years following the accounting year in
which the employer sells the goods produced or manufactured by him
or renders services as the case may be from such establishment, bonus
shall be payable only in respect of the accounting year in which the
employer derives profit from such establishment and such bonus shall
be calculated in accordance with the provisions of the Act in relation
to that year but without applying the provisions of Section 15.
• For the sixth and seventh accounting years following the accounting year in
which the employer sells the goods produced or manufactured by him or
renders services as the case may be from such establishment, the provisions
of Section 15 shall apply subject to the following modifications namely:-
• For the sixth accounting year- set on/ set off as the case may be, shall be
made in the manner illustrated in the fourth schedule taking into account the
excess or deficiency, if any as the case may be, of the allocable surplus set
on or set off in respect of the fifth and sixth accounting years.
• For the seventh accounting year: set on or set off, as the case may be, shall
be made in the manner illustrated in the fourth schedule taking into account
the excess or deficiency if any as the case may be of the allocable surplus
set on or set off in respect of fifth, sixth and seventh accounting years.
• (1C) From the eighth accounting year following the accounting year in
which the employer sells the goods produced or manufactured by him
or renders services, as the case may be from such establishment, the
provision of Section 15 shall apply in relation to such establishment as
they apply in relation to any other establishment.
• The provisions of Sub Sections (1), (1A), (1B) and (1C) shall so far as
may be apply to new departments or undertakings or branches set up
by existing establishments.
SECTION 17: ADJUSTMENT OF CUSTOMARY OR
INTERIM BONUS AGAINST BONUS PAYABLE UNDER
THE ACT
• Where in any accounting year:
An employer has paid any Puja Bonus or other customary bonus to an
employee or,
An employer has paid a part of the bonus payable under this Act to an
employee before the date on which such bonus becomes payable.
Then the employer shall be entitled to deduct the amount of bonus so
paid from the amount of bonus payable by him to the employee under
this Act in respect of that accounting year and the employee shall be
entitled to receive only the balance
SECTION 18: DEDUCTION OF CERTAIN AMOUNT
FROM BONUS PAYABLE UNDER THE ACT
• Where in any accounting year, an employee is found guilty of
misconduct causing financial loss to the employer then it shall be
lawful for the employer to deduct the amount of loss from the amount
of bonus payable by him to the employee under this Act in respect of
that accounting year only and the employee shall be entitled to receive
the balance, if any.
 SECTION 19: TIME LIMIT FOR
PAYMENT OF BONUS
• All amounts payable to an employee by way of bonus under this Act shall be
paid in cash by his employer:-
• Where there is a dispute regarding payment of bonus pending before any
authority: within a month from the date on which the award becomes enforceable
or the settlement comes into operation.
• In any other case, within a period of eight months from the close of the
accounting year:
• Provided that the appropriate government or such authority as the appropriate
government may specify in this behalf may upon an application made to it by the
employer and for sufficient reasons, by order extend the said period of 8 Months
to such further period as it thinks fit so, however that the total period so extended
shall not in any case exceed two years.
SECTION 20: APPLICATION OF ACT TO
ESTABLISHMENTS IN PUBLIC SECTOR IN CERTAIN
CASES
• If in any accounting year an establishment in public sector sells any
goods produced by it or renders any services, in competition with an
establishment in private sector, and the income from such sale or
services or both is not less than twenty percent of the gross income of
the establishment in public sector for that year then the provisions of
this Act shall apply in relation to such establishment in public sector as
they apply in relation to like establishment in public sector.